Dodd-Frank's Abusive Standard: A Call for Certainty

Dodd-Frank's "Abusive" Standard: A Call forCertainty

John D. Wright'

The "Abusive" Standard in Dodd-Frank § 1031 (d) ......................................... 166The Risks of Ambiguity in the "Abusive" Standard ........................................ 169A Call for Certainty: Safe Harbor Guidance .................................................... 172

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010(hereinafter, "Dodd-Frank" or the "Act") promises to radically transform theU.S. financial services industry. 2 The Act was based on five objectives forfinancial regulatory reform articulated by the Obama Administration in a June2009 white paper: 1) promote supervision and regulation of financial firms; 2)establish comprehensive supervision of financial markets; 3) protect consumersand investors from financial abuse; 4) provide the government with the tools itneeds to manage financial crises; and 5) raise international regulatory standardsand improve international cooperation. 3 Given the scale of transformationinvolved, Dodd-Frank is the most significant financial services reformlegislation since the Federal Deposit Insurance Act, the Glass-Steagall Act, andfederal securities laws of the 1930s.

For banks and others in the financial services industry4 who deal primarilywith consumers, the most radical change resulting from the Act is theestablishment of a new agency, the Bureau of Consumer Financial Protection(hereinafter, the "Bureau"), solely dedicated to consumer financial protection. 5

Vigorously opposed by the banking industry and other business interests during

the legislative process, 6 the Bureau will have vast rulemaking and enforcement

I. John D. Wright is Chief Regulatory Counsel of Wells Fargo & Company in San Francisco. Theauthor gratefully acknowledges the assistance of Lisa Magged, a second year student at Berkeley LawSchool.

2. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Pub. L. No. 111-203,124 Stat. 1376 (2010) (to be codified at 12 U.S.C. §§ 5301-641).

3. DEPARTMENT OF THE TREASURY, FINANCIAL REGULATORY REFORM, A NEW FOUNDATION:REBUILDING FINANCIAL SUPERVISION AND REGULATION 3-4 (2009) [hereinafter WHITE PAPER],

available at http://www.trcasury.gov/initiativcs/wsr/DocumentsFinalReport wcb.pdf.4. This paper will generally use the term "bank" to refer to all types of entities subject to the rules

of the new Bureau of Consumer Financial Protection. The universe of such entities extends far beyondbanks.

5. § 1001-100, 124 Stat. at 1955 (2010) (to be codified at 12 U.S.C. § 5481)(Title X - Bureau ofConsumer Financial Protection).

6. See Damian Paletta, Fight Over Consumer Agency Looms as Overhaul Is Signed, Wall St. J.,July 22, 2010, available at http://online.wsj.com/article/SB10001424052748704746804575367502836650966.html.

Dodd-Frank's "Abusive" Standard: A Call for Certainty

powers over not only banks, but over any entity that provides a "consumerfinancial product or service," with notable exclusions including securities andinsurance firms. When operations commence on July 21, 2011, 7 the Bureauwill consolidate under one roof the consumer enforcement and rulewritingpowers of seven different regulators. 8

Particularly alarming for large banks, the Bureau will have exclusivesupervisory authority over banks with assets of more than $10 billion. Set up asan independent entity within-and funded by-the Federal Reserve System, theBureau will have relatively little oversight, as the Director of the Bureau is not

accountable to a separate board, commission, or council. The only non-judicial

constraint on the Bureau's rulemaking authority is the power of the newFinancial Stability Oversight Council established by Dodd-Frank which, by avote of at least two-thirds of its members, may block a Bureau regulation it

determines a risk to the safety and soundness of the U.S. banking system or tothe stability of the U.S. financial system. 9 There is somewhat better oversightof the Bureau's supervisory authority through a requirement of coordinationwith an institution's prudential regulator and a mechanism for appeals ofdisagreements to an interagency panel.' 0

In addition to unprecedented institutional autonomy, the Act grants theBureau broad power to take enforcement action to prevent a bank or othercovered entity from engaging in an unfair, deceptive, or abusive act or practicein connection with the offering of a consumer financial product or service, or atransaction with a consumer for such a product or service. While there are well-

known standards in federal consumer law for determining whether acts orpractices are "unfair" or "deceptive,"'I the concept of "abusive" acts or

practices is not as well developed. 12 Perhaps recognizing this, Congress has

7. The "Designated Transfer Date" as established by the Secretary of the Treasury. See Bureau ofConsumer Financial Protection Designated Transfer Date, 75 Fed. Reg. 57252-53 (Sept. 20, 2010)(amending § 1062(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Pub.L. No. 111-203, 124 Stat. 1955 (2010)) (to be codified at 12 U.S.C. § 5481) (Title X - Bureau ofConsumer Financial Protection).

8. Consumer financial protection functions will be transferred to the Bureau from the followingagencies: the Board of Governors, the Comptroller of the Currency, the Office of Thrifi Supervision, theFederal Deposit Insurance Corporation, the Federal Trade Commission, the National Credit UnionAdministration, and the Department of Housing and Urban Development. § 1061, 124 Stat. at 2035.

9. § 1023(a), 124 Stat. at 2006.10. § 1025(e), 124 Stat. at 2006.11. For a summary of the relative roles of unfairness and deception that inform the Federal Trade

Commission's modem unfairness authority, see J. Howard Beales 111, "The FTC's Use of UnfairnessAuthority: Its Rise, Fall, and Resurrection" 22 J. OF PUB. POL'Y & MKTG. 192 (2003), available a!http://www.fte.gov/specches/beales/unfair06O3.shtm (Bealcs is the former Former Director of theBureau of Consumer Protection, Federal Trade Commission).

12. Notably, FTC Commissioner William E. Kovacic has expressed concern that the creation of theBureau will reduce rather than enhance consumer protection in financial services. Beyond mandates forinteragency coordination, there is no assurance that the Bureau will properly account for the FTC'sunfair and deceptive practices jurisprudence. Statement Submitted for the Record by CommissionerWilliam E. Kovacic on the Proposal to Create a Consumer Financial Protection Agency to the

Berkeley Business Law Joumal

established some limits on the Bureau's authority to declare an act or practice''abusive." Yet the language used to create these limits leaves considerableuncertainty about how the Bureau will exercise its consumer protection duties.

THE "ABUSIVE" STANDARD IN DODD-FRANK § 103 1(D)

Section 1031 of the Act is the source of the Bureau's broad enforcementand rulemaking powers regarding unfair, deceptive, or abusive practices.Section 1031(d) limits the Bureau's discretion to declare an act or practice"abusive" as follows:

The Bureau shall have no authority under this section to declare an act or practiceabusive in connection with the provision of a consumer financial product or service,unless the act or practice -

*Materially interferes with the ability of a consumer to understand a term orcondition of a consumer financial product or service; or

*Takes unreasonable advantage of-oA lack of understanding on the part of the consumer of the material

risks, costs, or conditions of the product or service; oroThe inability of the consumer to protect the interests of the

consumer in selecting or using a consumer financial product orservice; or

oThe reasonable reliance by the consumer on a covered person to actin the interests of the consumer. 13

The language used ostensibly to limit the Bureau's authority may beinterpreted by banks to require compliance with dramatically higher standardsfor consumer product development and marketing in order to avoid Bureauenforcement against abusive practices. In particular, the language introducesradically new concepts regarding the customer's understanding of bankingproducts, the customer's suitability for a banking product, and the bank's dutyto act in the interests of the consumer.

Absent clarification from the Bureau, banks may interpret Section1031(d)(2)(A) to require them to have a much greater understanding of the"financial literacy" of each individual customer than is the case today.Previously, banks have not been required to determine whether customersactually understand the terms of banking products, much less their risks.Instead, the focus of banking regulation has primarily been on the technicaladequacy of disclosures of product terms and conditions.' 4 Section1031 (d)(2)(A) introduces new, more subjective standards that appear to requirebanks to conduct customer-specific inquiries by obtaining information abouteach customer's financial circumstances and needs, even for mass-marketed

Committee on Energy & Commerce and the Committee on Financial Services, U.S. House ofRepresentatives, July 28, 2009, http://www.ftc.gov/speeches/kovacic/090728stmtrceord.pdf.

13. § 1031(d), 124 Stat. at 2006.14. See, e.g., Regulation E (Electronic Funds Transfers), 12 CFR pt 205; Regulation Z (Truth in

Lending), 12 CFR pt. 226.

Symposium Edition, 2011


commodity products like checking accounts and credit cards. Banks will wantguidance as to whether Bureau standards regarding customer comprehension ofproduct terms will be based on the accuracy and adequacy of productdisclosures to an average, reasonable consumer or whether the Bureau will takeenforcement actions if it determines that particular consumers don't understanda product.

Even more dramatically, Section 103 l(d)(2)(B) suggests that a bank will berequired to determine whether each individual customer is suitable for aproduct, even if there is clear and conspicuous disclosure of product terms, andeven if the bank concludes that the customer understands the product.' 5 Forbanks to apply a suitability standard would be a radical departure from howconsumer banking has traditionally been conducted. Apart from securitiesbrokers, no other industry is obligated to determine that its customers aresuitable for its products and services. A requirement for a suitabilitydetermination will add significant costs to the delivery of banking products andservices, and will create incentives for banks to offer plain vanilla productswith a limited menu of features. It is unlikely that many banks will want toensure the additional training and compliance costs that would be required toenable customized, product and customer-specific suitability determinations forwhat are, for the most part, commodity products.

Equally alarming is the implication under Section 103 1(d)(2)(C) that bankshave a duty to act in the interests of their individual customers, outside of thefiduciary contexts of trust or investment advisory settings. Traditionally, bankshave not been thought to have any legal duty to act in the interests of theircustomers. For conventional consumer banking products-that is, deposit,payment and credit products-compliance with disclosure requirements hastraditionally been enough. Yet one reading of Section 1031(d)(2)(C) is thatthere would be circumstances in which banks will be required by the Bureau toact in the customer's interests even when providing traditional products, lest theBureau find they are engaged in abusive practices. This is potentially a very bigchange. There is considerable case law indicating that banks do not have afiduciary duty regarding traditional banking products. See Das v. Bank ofAmerica, N.A., 112 Cal. Rptr. 3d 439, 450 (Cal. Ct. App. 2010) (holding that"absent special circumstances, a loan does not establish a fiduciary relationshipbetween a commercial bank and its debtor"); see also Renteria v. U.S., 452 F.Supp. 2d 910 (D. Ariz. 2006) (a lender has no duty to determine a borrower'sability to repay a loan because the lender's determination of the borrower'screditworthiness is for the lender's protection, not the borrower's); Nymark v.Heart Fed. Savings & Loan Assn., 283 Cal. Rptr. 53 (Cal. Ct. App. 1991)(commercial lenders pursue their own interests in lending money); Wagner v.

15. Id.

Berkeley Business Law Journal

Benson, 161 Cal.Rptr. 516 (Cal.Ct. App. 1980) (lenders owe no duty of care toborrowers in approving a loan).

It is submitted that the "reasonable reliance" concept in Section1031(d)(2)(C) was never intended to apply to the traditional context where aconsumer is directly dealing with a bank to obtain a deposit, payment or loanproduct. Rather, it appears that the Obama Administration had in mind the"financial intermediary" situation, that is, where the consumer has gone to adebt counselor, mortgage broker, or other advisor with the belief that he or shewill get impartial advice. The Administration's original white paper onfinancial regulatory reform, Financial Regulatory Reform, A New Foundation:Rebuilding Financial Supervision and Regulation (the "White Paper"), whichpreceded the submission of legislation that became the Dodd-Frank Act a yearlater, offers an authoritative source for such guidance. In the White Paper, theAdministration explained what it had in mind regarding the authority of aConsumer Financial Protection Agency ("CFPA", which became the Bureau inthe final Dodd-Frank Act) to impose "empirically justified and appropriatelytailored duties of care on financial intermediaries:"

Impartial advice represents one of the most important financial servicesconsumers can receive. Currently, debt counselors advise distressed and vulnerableborrowers on how to manage and reduce their debts. Mortgage brokers oftenadvertise their trustworthiness as advisors on difficult mortgage decisions. Whenthese intermediaries accept side payments from product providers, they cancompromise their ability to be impartial. Consumers, however, may retain faith thatthe intermediary is working for them and placing their interests above his or herown, even if the conflict of interest is disclosed. Accordingly, in some casesconsumers may reasonably but mistakenly rely on advice from conflictedintermediaries. It is unfair for intermediaries to take advantage of that trust.

To address this problem, we propose granting the CFPA authority to imposecarefully crafted duties of care on financial intermediaries. For example, the CFPAcould impose a duty of care to counteract an intermediary's patent conflict ofinterest, or to align an intermediary's conduct with consumers' reasonableexpectations as demonstrated by empirical evidence. The CFPA could also considerimposing on originators a requirement to disclose material information such as theconsumer's likely ability to qualify for a lower interest rate based on her riskprofile. In that regard, the CFPA could impose on mortgage brokers a duty of bestexecution with respect to available mortgage loans and a duty to determineaffordability for borrowers. 16

The White Paper correctly points to problems with debt counselors andmortgage brokers, individuals whose activities were in the past not wellregulated or supervised. These individuals generally have not been employeddirectly by banks. By contrast, for commodity, off-the-shelf products likedeposit accounts, certificates of deposit, debit cards, credit cards, home equitylines, or mortgage loans, banks have not traditionally acted as, and have notheld themselves out to be, impartial advisers or intermediaries. Rather, in the

16. WHITE PAPER, supra note 2, at 68 (emphasis added).



traditional banking industry view, it is the consumer's job to shop for thebanking product that is most suited to them, or that has the best terms andconditions based on all the consumer's needs.

Without guidance from the Bureau as to how the "reasonable reliance"concept will be interpreted and enforced, banks may conclude they will need toprovide disclaimers to customers that their role is limited to providing arequested product or service and the customer should not rely on the bank foradvice. While disclosing a clear distinction between a bank's role as acommodity product provider and that of an adviser or intermediary with a dutyto act in the customer's interests might be a good result from a bank customer'sperspective, the collateral consequence of this change may be a veryconservative shift in how and to whom banks market products and services. Itis too early to say whether the presumed gain in consumer protection will beoffset by an unacceptable reduction in the availability of banking products andservices as banks seek to avoid the risk of penalties for the "abusive" practiceof not acting in the interests of their customers.

THE RISKS OF AMBIGUITY IN THE "ABUSIVE" STANDARD

This Article maintains that the Bureau should proceed very cautiously inexercising its authority to pursue enforcement action, and engage inrulemaking, regarding "abusive" acts or practices. While it is clear that therehave been bad practices within the consumer financial services industry, whichis now subject to Bureau enforcement and rulemaking, most banks areresponsible players who are concerned about regulatory compliance andreputational risk, and want to do the right thing. Unless the Bureau takes earlysteps to clarify its enforcement intentions and create regulatory safe harbors,the likely consequences of the "abusive" standard in the Act--or moreprecisely, banks' fears about how the standard will be enforced--could besignificantly less financial product innovation, a reduction in consumer choice,and an increase in the cost of banking products to consumers. Banks may beginto limit themselves to "plain vanilla" products and services to avoid scrutiny bythe Bureau and the risk that explanations of more complex products will not beadequate under the new standards of the Act. 17

Such concerns were voiced in Washington, D.C. as legislators from both

17. Experience prior to Dodd-Frank is instructive regarding the costs associated with legaluncertainty in regulations. The Truth in Lending Act (TILA), passed in 1968, requires that lendersdisclose costs and terms of credit in a "clear and conspicuous manner." Due to legal uncertaintysurrounding provisions of the legislation, there were thirty-four official interpretations of the regulationa week before it became effective in 1969, and ten years later the Federal Reserve had published 1500official interpretations and more than 13,000 TILA lawsuits were filed in Federal courts. David T.Hirschmann, Statement of the U.S. Chamber of Commerce on The Proposed Consumer FinancialProtection Agency to the U.S. House Committee on Small Business (Sept. 23, 2009), http://www.centerforcapitalmarkets.com/wp-content/uploads/2010/04/DHTestimony92309.pdf.


sides of the aisle raised concerns regarding the potential effects of flaws in theDodd-Frank rule-making process. House Financial Services CommitteeChairman Bachus (R-Ala.) and committee member Hensarling (R-Texas) havewarned the Federal Reserve that "hastily written rules may end up doing moreharm than good to consumers and have negative effects on competition in themarketplace." 18 Barney Frank (D-Mass.), one of Dodd-Frank's foundingfathers, has cautioned that improperly crafted Dodd-Frank regulations "mayhave unintended consequences for consumer choice, the protection of consumerinformation and Congress' intent to reduce the burdens on community banks,credit unions and government-benefit programs."' 19 Ultimately, given that theBureau has yet to write its own rules on the abusive standard, it may be a longtime before consumers and financial institutions understand the associatedregulatory and economic consequences.20

In the meantime, a lack of clarity regarding the abusive standard may havea chilling effect on the market for innovative financial products, and theunintended consequence of reducing access to credit for those on the economicmargins and small business owners. 2 1 There are no legal standards in existenceto frame the scope and applicability of the "abusive" standard, and regulatingthe standard based on consumer perception will likely prove difficult. 22 Withsuch a subjective standard it's "unclear how a lender could guarantee acustomer's understanding, or what would constitute 'interfering' with it." 23

Even with their best efforts banks may be considered noncompliant. 24

Importantly, underbanked or economically disadvantaged customers maysuffer disproportionately from a more limited selection of banking products, asthey are likely to have the most problems of understanding and suitability. Themicrocredit and mortgage markets illustrate the potential reduction in creditavailability for high-risk consumers as a result of increased costs and risks oflending that can follow from regulatory efforts to overly proscribe lenderpractices.

Microcredit financial products, such as the iAdvance short-term prepaidcredit option, present an opportunity for high-risk consumers to access creditand build their credit profiles. Experts speculate that the Office of Thrift

18. Claude R. Marx, Republicans Vow to Monitor Regulators, CREDIT UNION TIMES, Jan. 12, 2011.19. Id.20. Noreen Secbacher, New Legislation Causing Angst, 46 FAIRFIELD COUNTY BUS. J., (2010).

Comment by Thomas Crane, owner of Crane Wealth Management Group LLC, a planning firm in NewCity, New York.

21. See Jack Milligan, A Massive Overhaul, 70 MORTG. BANKING 22 (2010); Hirschmann, supranote 17.

22. Cheyenne Hopkins, 'Chilling Effect' of Abusive' in Dodd-Frank, 175 AM. BANKER 1 (2010)(quoting Laurence Platt, partner at K&L Gates; Jean Veta, partner at Covington & Burling; and LynnBarr, partner at Goodwin Proctor).

23. Id.24. Id.



Supervision's recent shutdown of iAdvance based on "unfair or deceptive actsor practices," with no further guidance provided on acceptable practices orproducts, had a "chilling effect" on the market for microcredit products. 5

Accordingly, as a likely response to iAdvance's fate, Think Finance's ElasticCard-a prepaid debit card with a $500 line of credit and fee rebates for on-time payments-was subsequently dropped from a bank partnership. 26

According to the Center for Financial Services Innovation, a lack of clarityaround how the new Bureau will handle financial products may likewise placeinnovation on hold.27

In terms of the mortgage market, the Act takes a "punitive approach"towards innovative products "designed to fill a narrow niche of legitimateneeds" by providing credit to homebuyers who otherwise could not qualify fora standard thirty-year fixed-rate or adjustable-rate mortgage. 28 While largebanks have traditionally been willing to test new consumer financial productsgiven their ability to absorb loan losses, they will likely be unwilling toexperiment for the foreseeable future. 29 Now that the mortgage industry isforced to go beyond disclosure requirements to ask whether its products arefair, the potential risks to lenders are too great when faced with possiblepenalties from the Bureau including rescission of contracts, restitution, andcivil penalties of up to one million dollars per day.30 Instead, the Act may endup shutting out borrowers with poor credit histories from the possibility ofhome ownership.3 '

As an illustration of this possibility, North Carolina's 1999 enactment ofstrict anti-predatory lending laws caused many responsible lenders to stopmaking loans in the state, with collateral damage to underserved communities.North Carolina Senate Bill 1149 was passed to institute stricter state mortgageregulations than the existing federal Home Ownership and Equity ProtectionAct ("HOEPA"), which imposed consumer protections on mortgage loansdeemed "potentially predatory."' 32 North Carolina's bill utilized a broaderdefinition for high-cost loans and imposed more severe restrictions, includingstrict liability provisions that would penalize "even the most diligent and risk-averse lenders." 33 Ultimately, the law led to a reduction in the availability of

25. Sara Lepro, Doubts Cloud the Future of Debit-Credit Products. 175 AM. BANKER 1 (2010).26. Id.27. Id.28. Milligan, supra note 21.29. Id. at 24 (comments by Tom Brown, president and founder of a New York-based hedgc fund).30. Id.31. Id. at 24-27 (comments by Larry Piatt, K&L Gates).32. Gregory Ellichausen & Michael E. Staten,, Regulation of Subprime Mortgage Products: An

Analysis of North Carolina's Predatory Lending Law, 29 J. OF REAL EST. FIN. & ECON. 411, 411-12(2004).

33. Id.; Donald C. Lampe, Wrong from the Start? North Carolina's Predatory Lending' Law andthe Practice vs. Product Debate, 7 CHAP. L. REV. 135 (2004).


high-cost loan credit in the state because legitimate lenders would not acceptthe compliance burdens, and the substantial legal and reputational risks. 34 Afterthe bill passed low-income borrowers in North Carolina collectively realized asubstantial fourteen percent decline in subprime closed-end mortgageoriginations with nine major national lenders, while high-income borrowerswere not significantly affected.35

Finally, the Act's blunt, one-size-fits-all approach to regulation of creditproducts could have a detrimental effect on small businesses. 36 The smallbusiness sector, with different needs and a higher appetite for risk than anaverage consumer, often relies on credit cards, home equity loans, and "fringe"consumer credit products used by individuals who own small businesses inorder to meet short-term capital needs. 37 According to Thomas Durkin, aformer Senior Economist with the Division of Research and Statistics at theFederal Reserve Board, the legal uncertainty and lack of precedents forguidance about how to interpret the abusive standard creates disincentives andhigher costs for new financial products. 38 Specifically, the Act creates newrisks and increased costs for lenders due to the potential for regulatory finesand litigation from extending credit, which in turn creates pressure for lendersto raise prices on consumer credit products and will cause some lenders towithdraw products from the market.39 Notably, the Act gives states theauthority to issue more restrictive consumer regulations than those adopted bythe Bureau, which increases the magnitude of litigation exposure and variancein regulations possible. 40 Industry advocates have asserted that the associatedincreased cost of credit for small businesses could result in slower economicgrowth, fewer new businesses, and a reduction in jobs.4 1

A CALL FOR CERTAINTY: SAFE HARBOR GUIDANCE

To avoid these adverse consequences, the Bureau should consider takingsteps to provide more certainty regarding its approach to enforcement andsupervision of the "abusive" standard by providing safe-harbor guidance. Auseful early action for the Bureau would be guidance applicable to specificcategories of consumer practices regarding acts or practices that it will not

34. Lampe, supra note 33, at 144.

35. Elliehausen, supra note 32, at 429. Elliehausen and Staten hypothesize that it's unlikely thedeclines were solely due to reduced predatory and abusive lending because North Carolina subprimelending terms were "consistent with a properly functioning market" and thus reflected loans' riskappropriately. This is in contrast to predatory lending that involves fraud or deception rather thanexplicit subprime terms. Id. at 430.

36. Hirschmann, supra note 17.

37. Id.

38. Id.39. Id.40. Id.41. Id.



consider to be abusive, or that it will considered abusive only under certaindefined circumstances. The Bureau could also provide guidance about whatprocesses banks should implement to ensure that consumers understand productrisks and costs, and whether a particular product meets the consumer's needs.Such guidance should make it clear that if banks follow these processes, theywill not be second-guessed by the Bureau.

An example of product-specific guidance is the Office of the Comptrollerof the Currency's (OCC) 2005 Guidelines Establishing Standards forResidential Mortgage Lending 42 (hereinafter, "Guidelines"). The OCC issuedthe Guidelines "as a further step to protect against national bank involvement inpredatory, abusive, unfair, or deceptive residential mortgage lending practices,"following a series of advisory letters on this topic in 2003. 4 The Guidelinesprovide detailed yet flexible guidance regarding this type of consumer bankingproduct.

One part of the Guidelines lists specific mortgage lending practices whichnational banks are told to avoid altogether. A second part sets out loan terms,conditions and features that "may, under particular circumstances, besusceptible to abusive, predatory, unfair or deceptive practices, yet may beappropriate and acceptable risk mitigation measures, consistent with safe andsound lending, and benefit customers under particular circumstances." 44 TheGuidelines state that "heightened diligence" should be exercised when offeringloans with this second type of feature (e.g., negative amortization) toconsumers who are elderly, substantially indebted, not financiallysophisticated, have language barriers, limited or poor credit histories, or othercharacteristics that limit their credit choices. 45 By providing a great deal ofspecificity regarding which particular product features are never acceptable andwhich might be acceptable under certain circumstances, the Guidelines offer auseful template for the Bureau to follow for other types of consumer products.

An example of helpful "process" guidance that the Bureau could emulate isOCC Bulletin 2004-20, entitled Risk Management of New, Expanded, orModified Bank Products and Services. 46 This bulletin sets forth a number offactors that national banks should consider as part of their product developmentprocess. The Bureau could reduce industry fears and more effectively leverageits influence by issuing similar guidance applicable to consumer products. Suchguidance could provide that banks should consider the Section 1031(d) factors

42. OCC Guidelines Establishing Standards for Residential Mortgage Lending Practices, 70 Fed.Reg. 6329, 6329-34 (Feb. 7, 2005) (to be codified at 12 C.F.R. pt. 30), available at http://www.occ.gov/news-issuances/federal-register/70fr6329.pdf

43. Id. at 6329.44. Id. at 6333.45 Id. at 6331.46. Office of the Comptroller of the Currency, Bulletin: Risk Management Process (May 10, 2004),

http://www.occ.gov/news-issuances/bulletins/2004/bulletin-2004-20.html.


for both new and pre-existing consumer products. By requiring that banksexplicitly consider consumer protection requirements in their own internalprocesses, the Bureau is likely to achieve more positive changes in consumerproducts than through selective enforcement of particular cases. In addition, theBureau and other supervisory agencies that adopt the same guidance on aninteragency basis would be able to examine the adequacy of product reviewprocesses. Banks that have adopted robust processes could be providedappropriate assurances that their decisions would not be second-guessedthrough Bureau enforcement. Unless banks have reasonable certainty in thisarea, they are likely to become overcautious with respect to both productinnovation and the types of customers to whom new products are marketed.

The Bureau should also provide advisory guidance regarding the limitednature of the "reasonable reliance" concept that was intended by the proponentsof the Act. Specifically, the Bureau could issue guidance to the effect that itwill generally enforce the Section 1031(d)(2)(C) prong of the "abusive"standard only in situations where a bank is acting as a "financial intermediary."Further, the Bureau could provide concrete illustrations of those situations, aswell as situations where a bank is not so acting and thus would not generally bechallenged by the Bureau.

The Bureau is about to undertake regulation of consumer financial productsand services on a scale never before attempted in the Unites States. The Actprovides the Bureau with unprecedented powers to regulate and supervise muchof the financial services industry through enforcement of existing federalconsumer financial laws by a single agency, in addition to sweeping newauthority to prevent abusive practices. The Bureau's acts, and the threat of itspower to act, will have benefits and costs that are hard to measure. In order toachieve the maximum benefits of reform and minimize costs and unintendedconsequences, the Bureau should focus its resources to provide the financialservices industry with as much certainty as possible, as early as possible,regarding how it will enforce its new authority. Absent this certainty, theindustry may freeze up and remain very cautious about product innovation andthe wide availability of banking products, to the detriment of consumers andthe economy. The Bureau should act quickly to avoid this unnecessary, adverseresult of financial services reform.
